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Chapter 5 Features and operation of non-proportional reinsurance treaties 5/5

A1B Advantages and disadvantages of excess of loss treaties
Compared to proportional treaties, non-proportional business has the following advantages:
• Accounting procedures are simplified compared to proportional business, which is usually accounted
for on a quarterly basis. In addition, proportional treaties may provide for entries for claims that occur
above the cash call limit.

Question 5.2

In treaties, what do we mean by a cash call limit?

Regardless of significant movement in the account, proportional treaties require quarterly statements
Proportional treaties
that have to continue while the treaty remains open. Only when all movements on the account have require quarterly
ceased, or the treaty has become ‘clean cut’, can the production of quarterly statements be statements
discontinued. This can be an administrative burden for all concerned.
• Administration costs are substantially reduced because there is less movement within the account.
Generally there is only a major reconciliation at the end of the contract period, and when claims have
to be settled.
• The reinsurance premium is all inclusive and not calculated on each cession but on the whole of the
ceding insurer’s portfolio in one or more branches, in order to cover losses occurring during a calendar
or treaty year.
• The reinsurance premium is predetermined.
• Usually, there is no profit commission. Chapter
• The reinsurer does not deposit technical reserves. 5
Non-proportional business has the following disadvantages for the reinsurer:
• Calculation of excess of loss business is more complex and requires greater checking, including the
use of actuarial or rating models.
• The cost of reinsurance can vary considerably from one accounting period to the next depending on
the development of the premium income, of the loss ratio and of the reinsurance market. Reference copy for CII Face to Face Training
• Lower premiums are received when compared to proportional business. This is due to the elimination
of a proportional recovery of all the smaller claims.
• The treaty can be unprofitable for the reinsurer whilst simultaneously being profitable for the
reinsured.
Reinforce
Before you move on, ensure that you are clear about both the advantages and disadvantages of excess of loss
treaties.

A1C Use of excess of loss with other types of reinsurance
While treaty excess of loss reinsurance may be used by an insurer as the sole means of protecting an
account or class of business by purchasing protection both at a per risk level and for catastrophe
situations, it is also widely used in conjunction with proportional reinsurances in cases where the
insurer does not want the restrictions in the amount of risk cover that may be available from excess of
loss reinsurers. There might also be concerns over the effect that an accumulation of losses arising out
of one event may have on its overall net retained liability.
In this case, the individual risk protection would be provided by quota share and/or surplus treaties,
and/or facultative policies, with the excess of loss treaty being in place to respond when the
accumulated losses to the reinsured on individual risks arising out of one event reach an unacceptable
level. This point will vary depending on the financial strength of the company concerned but would be
deemed to be the point at which true catastrophe protection would commence.